Uber's Brilliant Strategy to Make Itself Too Big to Ban

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Uber's Brilliant Strategy to Make Itself Too Big to Ban

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The question of how Uber would spend its billion-dollar investment was never really much of a riddle. More rides in more places has always been the plan.

But with its ten-figure cushion, the San Francisco-based ride-hailing startup can be more cunning about how it tries to get huge. Uber wants to grow as quickly it can, and right now, it's chasing that goal by undercutting the competition on price—even if it loses money in the process. This isn't a novel approach among tech startups, for which profits aren't valued nearly as much as popularity. But for Uber, playing in the new realm of the so-called sharing economy, the stakes are higher, since so many entrenched interests are trying to regulate it out of existence. With not just success but survival on the line, Uber has even more incentive to expand as rapidly as possible. If it gets big enough quickly enough, the political price could become too high for any elected official who tries to pull Uber to the curb.

Yesterday, Uber announced it was lowering UberX fares by 20 percent in New York City, claiming the cuts would make its cheapest service cheaper than a regular yellow taxi. That follows a 25 percent decrease in the San Francisco Bay Area announced last week, and a similar drop in Los Angeles UberX prices revealed earlier last month. The company says UberX drivers in California (though apparently not in New York) will still get paid their standard 80 percent portion of what the fare would have been before the discount. As Forbes' Ellen Huet points out, the arrangement means a San Francisco ride that once cost $15 will now cost passengers $11.25, but the driver still gets paid $12.

Uber says its new, lower UberX fares are cheaper than New York yellow cabs.

Image: Uber

In that scenario, Uber loses money twice-over. First, it loses the 75 cents extra it pays to make up the difference to the driver. Second, its taking exactly zero commission. In effect, the company is paying for passengers to ride. Loss leaders may be nothing new, but it's a little different when you're losing money on the main thing you sell. To be fair, Uber's original black car business could make up some of the difference. But the company isn't likely too worried either way. Its strategy here is much less traditional taxi and much more typical dotcom: grow the user base as quickly as possible and worry about making money later.

Like Uber, Like Amazon

Consider Uber's kinship with Amazon. The comparison isn't obvious at first, since Uber doesn't sell goods, just a service. But their stories are similar. A startup led by a brash, charismatic CEO catches a creaky old industry unaware. It grows quickly, and its popularity explodes as its brand becomes nearly synonymous with the disruptive service it's offering. Amazon grew—and is still growing— because it's not afraid to lose money. Low prices and free shipping deals eat away at profitability, but they also keep customers coming back. Uber CEO Travis Kalanick has expressed admiration for Amazon founder Jeff Bezos, who is also an investor in the transportation company. And now Kalanick appears to be taking cues from the Amazon template.

Whether this strategy is really sustainable for Amazon after twenty years of existence is a question endlessly debated among shareholders. But for its current stage of development, the approach holds little but upside for Uber. Rapid expansion helps Uber both locally and globally. In cities, underselling traditional taxis gets more riders in UberX cars, striking a blow against yellow-cab competition. Popularity in one city creates covetousness in others. Demand spreads, and Uber follows (it now operates in about 140 cities in 40 countries around the world).

To keep spreading quickly, Uber needs to aggressively recruit new drivers, which could be difficult if price cuts also meant cuts to driver pay. Fiddling with prices has led to driver unrest, and the company's assurances that drivers can make more than $90,000 per year in New York have been met with skepticism. On Twitter, Kalanick argued that lower prices meant drivers could make more, because increased demand would lead to more rides booked per hour. That claim is a lot easier to make if Uber is in fact subsidizing driver pay at a loss.

Don't Take My Uber Away

But keeping drivers behind the wheel is ultimately an operational issue that Uber so far has handled adeptly. Much more dangerous to its future prospects are ongoing threats from regulators and lawmakers to shut Uber down, or at least severely curtail its freedom to operate. Ever since receiving (and ignoring) a cease-and-desist demand from transit regulators in San Francisco, Uber's first city, in 2010, the company has followed the same playbook when faced with attempts to shut it down: keep the wheels on the road. The strategy has worked so far in San Francisco, though various state-level attempts to rein in Uber are still in play. Uber has survived many other efforts to restrict its service, though these victories are often incremental, and seldom come without extensive time and effort.

The uncertainty that comes with attempting to regulate Uber out of existence can't be too comforting to investors, though it also didn't deter more than $1.2 billion in funding so far. Some of that money is going toward hiring high-powered lobbyists to push back. But more powerful political leverage comes in the form of popularity. “The more they sort of popularize themselves, the stronger their argument becomes" against crackdowns, New York University Stern School of Business professor Arun Sundararajan told Businessweek.

That strength, however, doesn't have as much to do with the quality of the argument as it does with the quantity of people who support it. The more riders Uber can get in its cars and accustomed to having its push-button convenience as an option, the less incentive politicians have to stay on Uber's case. By drastically lowering its prices, Uber is doing more than increasing its customer base. It's cultivating constituents – the people who will complain when someone in power tries to take away their Uber. If Uber can survive its many political battles, it stands to become a huge, and hugely valuable, global enterprise. For investors, that's a billion dollars well spent.